Role of FDI requires examination

By Eric Chiou 邱奕宏

In July, the UN Conference on Trade and Development (UNCTAD) issued the 2012 World Investment Report (WIR), which revealed that foreign direct investment (FDI) inflows into Taiwan amounted to US$1.96 billion last year. This figure was the worst among East and Southeast Asian countries, and put Taiwan in the second-lowest place worldwide, only ranking above Angola.

The news has triggered criticism of the government’s efforts to boost the economy and has also spurred some immediate responses from the government in considering new initiatives for promoting foreign investment.

However, a quick fix can hardly cure a chronic illness, nor can it be expected to bring any substantial results. Without a thorough understanding of why Taiwan is no longer attractive for FDI and a prudent blueprint for the future role of FDI in Taiwan’s economy, any reckless pro-FDI policy will not address the root cause of the problems.

UNCTAD’s report highlighted more issues than just the FDI deficit. For example, the report’s FDI Attraction Index, which evaluates countries’ success in attracting FDI over the past three years, indicated that the economies of Taiwan’s neighbors Hong Kong and Singapore had made remarkable achievements in drawing FDI, and were respectively ranked No. 1 and No. 3 in the world.

By contrast, Taiwan’s ranking had declined for the fourth consecutive year, dropping to 151st place last year. The report also pointed out that China and Indonesia are ranked No. 1 and No. 4 as the most likely destinations for FDI worldwide in the period 2012-2014.

Similarly, other Asian countries, such as Thailand, Vietnam, Japan, South Korea and Malaysia, are also in the top 20. Taiwan remains anonymous and unattractive in the eyes of global multinational executives.

This disheartening reality is actually a wake-up call. If policy-makers have listened carefully, perhaps, they might be able to find the correct prescriptions to cure the anemia of Taiwan’s foreign investment.

Before pondering how to formulate feasible measures to attract FDI, policymakers should ask themselves a few key questions: Why does Taiwan need FDI? What kind of FDI should it look for? And what would be the expected contribution of FDI to Taiwan’s economy? The more unequivocal answers policymakers have, the better chance the government has of forming precise and effective policies to entice FDI.

FDI has been a major factor behind economic globalization. For a host country, FDI inflows bring numerous benefits, including the spread of technologies, dissemination of know-how and managerial skills, enhanced employment opportunities, facilitation of capital flows, and so on.

However, FDI can also induce adverse effects and unpleasant controversies, like the exploitation of labor and environmental destruction. Considering the various costs and benefits of FDI, the question of why Taiwan needs to devote effort to encouraging FDI becomes the foremost issue to be considered.

Does Taiwan lack the required FDI for capital formation to propel the economy? The answer is negative. Although official statistics show that Taiwan’s private investment rate has been declining for years, Taiwan’s FDI outflows have been on the rise, particularly the FDI outflows to China.

Moreover, despite the shrinking average wage, speculative ventures in Taiwan’s stock and real-estate markets have barely been restrained, while skyrocketing housing prices also show no sign of weakening. In other words, as a result of the government’s loose monetary policy, private capital is quite abundant.